Factories slump, spending booms

FRESH evidence of the two-speed economy emerged as official data showed consumer spending boomed during the second quarter while manufacturing suffered its biggest slump since the depths of the last recession in 1991.

Government statisticians stuck with their earlier estimate of 0.3% gross domestic product growth in the second quarter, giving a year-on-year increase of 2.1%, but published a breakdown for the first time.

That showed consumer spending doubled from 0.6% in the first quarter to 1.2%, confirming recent reports of surging High Street sales. But manufacturing output shrank by 2%, the biggest contraction in a decade.

Service-sector growth was revised up to 0.8%, holding up in the face of the foot-and-mouth outbreak. Economist George Buckley at Deutsche Bank said: 'The hawks on the Bank of England's monetary policy committee will need to see some hard evidence that spending is slowing before cutting interest rates again.'

The US federal Reserve's quarter-point reduction in interest rates to 3.5% - the lowest for seven years - had been widely anticipated, and markets were disappointed by the downbeat tone of the accompanying statement. Offering no glimmers of hope, the Fed said 'the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future'.

Economist Steven Andrew at Royal & SunAlliance Investments said: 'We expect real evidence of an upturn still to be thin on the ground by the time the Fed next gathers on 2 October, leaving open the likelihood of a final quarter-point cut at that meeting.'

Meanwhile, the euro bounced to a five-month high of 92.39 US cents (63.38p) after a key barometer of the German economy staged a recovery. The Ifo business climate index rose to 89.8 in July from 89.5 in June, confounding expectations of a fall.